Obama rewrites the history of the Reagan revolution as
the beginning of the bad times.
By James Pethokoukis
To consider only the seen while
neglecting the unseen, as 19th-century political economist Frederic Bastiat
warned, risks cognitive errors. Policymakers must try to imagine the
counterfactual when making a decision, taking an action, or analyzing history.
President Obama’s big speech on
inequality last week illustrates vividly the value of asking, “What
if . . . ?” Rising income inequality and declining economic
mobility, the president declared, are “a fundamental threat to the American
dream, our way of life, and what we stand for around the globe.” This factually
suspect argument is put forth by Obama to promote his agenda of higher taxes, a
higher minimum wage, and higher spending. To support it, he gave a revisionist
history lesson worthy of Howard Zinn.
Many Americans recall the 1980s as the
beginning of an improbable Long Boom when pro-market polices reversed what at
the time had seemed like unstoppable economic decline. Obama, however,
described the Reagan revolution as the moment when the postwar “social contract
began to unravel” and “trickle-down ideology became more permanent,” leading to
decades of dangerously unbalanced economic growth. The rich got even richer as
middle-class incomes stagnated. The Age of Inequality had begun.
Actually, middle-class incomes rose
roughly 40 percent from 1979 through 2007, and nearly 50 million net new jobs
were created. (As President Reagan said on leaving office, “All in all, not
bad, not bad at all.”) But leave aside Obama’s factual errors. What’s the
president’s counterfactual? What would America be like today had it not
embraced center-right reforms such as deregulation, tax cuts, and free trade?
What if government had prevented the mergers and takeovers that enabled
Corporate America’s necessary restructuring?
An educated guess is possible thanks to
two large advanced economies that provide a pair of natural economic
experiments. Unlike Reagan’s America and Thatcher’s Britain, Japan in the 1980s
declined to undertake “neoliberal” reforms to open its economy, as finance
professor Noah Smith recently noted
in Foreign Affairs. Corporate taxation there today is high, key
industries such as retailing and agriculture are protected from competition and
subsidized, and labor markets remain tightly regulated. Workers don’t move
around much. Sure, Japan has less income inequality. But it also has less
dynamism. Over the past two decades, Japan’s per capita GDP has fallen from 85
percent of America’s to 71 percent. Indeed, one of Prime Minister Shinzo Abe’s
“three arrows” of economic reform is injecting more competition and churn —
creative destruction, really — into the Japanese economy.
Then there’s France, which continues to
sniff at the “Anglo-Saxon” style of capitalism. Taxes there are high and headed
higher, unions are strong, and inequality is low. Its per capita GDP is also
only a bit more than two-thirds of America’s, and France is hardly anyone’s
idea of a dynamic economy pushing the technological frontier. Oh, and the
French economy seems on the verge of its third recession in five years.
Now both France and Japan are wealthy
nations with some big, successful multinational corporations. And each has a
vibrant culture. But would anyone say they are flourishing? From these
examples, we can reasonably conclude that if America had rejected the Reagan
revolution, we might well have less inequality today, but we would probably
also have less wealth, entrepreneurship, innovation, and, when you think of it,
less fun. Further evidence for our counterfactual: a 2009
study by researchers Dan Andrews, Christopher Jencks, and
Andrew Leigh that found that more inequality is actually associated with higher
GDP growth. Obama mentioned lots of stats and studies in his income-inequality
speech, but he somehow failed to cite this one.
Of course, it may not feel like America
is prospering right now, either. While the economy added a better-than-expected
203,000 jobs last month, there are still nearly 4 million fewer full-time
workers today than before the Great Recession. But it could be worse. At least
America is growing and adding jobs. If we’re going to do a lot better, though,
we need to draw the right lessons from the past — not distort it to promote
stale ideological agendas.
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